Imagine that two oil companies Big Petro Inc and Gargantuan

Imagine that two oil companies, Big Petro Inc. and Gargantuan Gas, own adjacent oil fields. Under the fields is a common pool of oil worth $48 million. Drilling a well to recover oil costs $2 million per well. If each company drills one well, each will get half of the oil and earn a $22 million profit ($24 million in revenue - $2 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue. Given this information, what is the Nash Equilibrium?

Both companies drill two wells and earn $20 million profit

Big Petro drills two wells and earns $28 million profit, while Gargantuan drills one well and earns $14 million profit

Gargantuan drills two wells and earns $28 million profit, while Big Petro drills one well and earns $14 million profit

Both companies drill one well and earn $22 million profit

Solution

Ans is A

Both companies will drill two wells and earn $20million because nash equilibrium is a strategy set where each player plays his/her strategy given the startegy of other player.

Because oif both vomoanies decide to drill one well then one can increase the reveneue by drilling second well.